Fed cuts interest rates a quarter-point

Other crosscurrents have made the Fed’s job tougher. A weaker dollar, for example, has given U.S. companies a shot in the arm, boosting exports and increasing profits made from overseas operations when that money is brought back home. But a continued slide in the U.S. currency could put added upward pressure on long-term interest rates, as foreign investors demand higher returns to buy Treasury debt that’s backed by a falling currency.

Cutting rates also risks easing up on the Fed’s perennial battle against inflation. The latest GDP report showed prices rising at an annual rate of 1.8 percent in the third quarter – up from the 1.4 percent rate in the second quarter but still within the Fed’s unofficial “comfort zone.” But the recent surge in oil prices — which the Fed highlighted in its commentary — could begin to put pressure on the price of other products.

Higher food prices are also a concern. One Wednesday, Kraft Foods reported that profits in the latest quarter were been squeezed by higher dairy prices. Though companies facing higher raw materials prices can absorb them for awhile, a prolonged rise in producer prices eventually gets passed along to consumers.

The Fed had pushed the federal funds rate up a record 17 consecutive times in quarter-point moves over two years. The last increase occurred in June 2006. From that time until last month, the rate was left unchanged as the central bank watched to see whether its credit tightening had the desired effect of slowing the economy enough to lessen inflation pressures.

However, the Fed’s goal of a soft-landing in which growth slows and inflation is contained has been threatened by the most severe housing downturn in more than two decades. Economists are worried that the credit crisis this summer will make home sales and prices fall even further, threatening consumer confidence and causing consumers to cut back on their spending.

Full text of Fed statement
The full text of the Fed's statement is below:

The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 4-1/2 percent.

Economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance.  However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction.  Today’s action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time.

Readings on core inflation have improved modestly this year, but recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation.  In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.

The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth.  The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.

Voting for the FOMC monetary policy action were:  Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Donald L. Kohn; Randall S. Kroszner;
Frederic S. Mishkin; William Poole; Eric S. Rosengren; and Kevin M. Warsh.  Voting against was Thomas M. Hoenig, who preferred no change in the federal funds rate at this meeting.

In a related action, the Board of Governors unanimously approved a 25-basis-point decrease in the discount rate to 5 percent.  In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Richmond, Atlanta, Chicago, St. Louis, and San Francisco.

Don't miss this on MSNBC.com Pass it on: Sons of infertile men may be next The eight biggest Olympic marketing debacles Reality show judges range from wise to wacko Cosmic Log: Is this your jetpack? Forget your inhibitions: World's sexiest islands

MORE FROM STOCKS & ECONOMY

Stocks & economy Section Front

Stocks up a third day, helped by housing report Home sales surge, boosting recovery hopes Home resales surge to nearly 3-year high   Advocates want more for black unemployed Oil markets could settle after OPEC inaction States’ jobless funds going ‘absolutely broke’ Economists: We don't need more stimulus Few borrowers helped by modified mortgages  Rebound leads AP’s top business stories of ’09 Investors want to believe in ‘Santa Claus rally’ Stocks & economy Section Front   Add Stocks & economy headlines to your news reader: